Different forms of gold standard
Different forms of gold standard are discussed ahead.
Gold Standard
When the unit of money is exclusively defined by law as a certain amount of gold, of specified weight and fineness and when all forms of money with in a monetary system are convertible into gold at a fixed rate, then it is called gold standard.
Features of Gold Standard
1. Full Gold or Gold Currency Standard: In this currency standard the units of currency are full bodied gold coins. A certain amount of gold of specified weight and fineness is declared by law to be the currency of the country.
2. Free Coinage: People are allowed to get the bullion converted in unlimited quantity into standard gold coins with or without charge. Gold can be melted by the people, there is no restriction.
3. Freedom of Purchase and Sales: People are at liberty to purchase, sale, import or export the gold. There is no limitation.
4. Legal Tender: Gold is declared a legal tender money. People accept it on the basis of the metals utility.
5. Convertibility: Other forms of money can be converted at par in gold coins. So it provides security to other forms of money. People accept the other forms of money because its purchasing power is equal to the gold coins. Due to shortage of gold this system could not be maintained in first world war.
Gold Bullion Standard
Gold bullion standard was introduced in 1925 in England. The structure of gold bullion standard was different from that of gold standard. Its main characteristics are following:
1. Gold coins do not circulate: The actual currency consists of paper currency notes and other token coins, while gold coins do not circulate. But central bank is under obligation to convert them into gold bullion.
2. Coinage of gold is not free: The holder of gold is not entitled to get it converted in to gold coins.
3. Purchase/Sale of gold: Government purchases and sells the gold at a fixed price. The seller of gold is paid in other forms of money, which may be paper or bank money.
4. Gold Reserves: Gold reserves are held in the form of bullion bars by the central bank.
5. No restriction on use: There is no restriction on the use of gold bullion on the individuals. The people can even export the gold. Government purchases and sells the gold at a fixed price.
6. Gold reserves: Gold reserves are held in the form of bullion bars by the central bank.
Advantages of Gold Bullion Standard: This standard was adopted due to the following reasons, in Britain, France, U.S.A and India.
1. Economy in the use of gold: It economizes the use of gold, because gold coins are not circulated in the country.
2. No wear and tear : When gold coins circulate then a lot of gold is wasted in wear and tear. However, this was avoided in this form.
3. No demand of gold: Gold is not demanded in exchange for notes. Gold can be held by central bank of the country.
4. Prestige restored: When gold is kept in the hands of the Government it gives full support in the effective monetary management of the economy.
5. Automatic system: The expansion and contraction of currency is automatically maintained by the sale and purchase of gold. When Government purchases the gold, the currency in circulation contracts.
Gold Exchange Standard
The arrangement to purchase gold drafts which are convertible into gold abroad from the central bank is known as gold exchange standard. It is an advanced form of gold standard and its main requisites are following:
1. Gold coins do not circulate: In this standard also gold coins do not circulate in the country.
2. Internal currency is not convertible : The internal currency may be paper notes but these are not convertible in to gold.
3. Case of gold exchange country: The currency of the gold exchange country is however freely convertible into the currency of gold standard country.
4. Reserves are kept in other forms of money: The reserves of gold exchange country are kept in the form of bank deposits, treasury bills and other liquid assets in those countries which are on gold standard.
5. Stable Exchange Rates : In this standard, exchange rate stability is secured and international payments are facilitated.
6. Economical : This system is very economical and lot of precious gold is saved.
Demerits:
1. Complicated System: It is very difficult and complicated system and common man cannot understand it.
2. Not Elastic: It is not an elastic system, specially the contraction of currency is very difficult affair.
3. Reserve Duplication: It creates unnecessary duplication of reserves sometimes the balances were kept in gold standard reserves, paper currency reserves, and Govemment balances.
4. Conversion Problem: There is also a danger of depository country to default on its promise to convert the currency into gold at a predetermined rate.
5. Deficit or Surplus Problem: If a country on gold exchange standard develops a cronic deficit or surplus it leads to speculative activities which are harmful for the economy in long run.
